Public sector staff who are on low incomes, like firefighters, police officers, could be eligible under the new scheme. Photograph: David Sillitoe

Struggling first-time buyers will be able to take out a mortgage for half of the property's cost under a revamped government scheme, the Guardian has learned. Selected key public-sector workers will be able to choose whatever home they want to buy and pay for half of the property at normal interest rates and the remainder initially at just 1.75%.

The new initiative, to be launched next month, replaces an existing scheme offering cut-price mortgages, which, critics say, has proved an embarrassing flop. Sources close to the process claim the "Open Market HomeBuy" scheme, which went live amid much fanfare in October 2006, has helped, at most, just 2,000 first-time buyers on to the property ladder. That represents less than 0.6% of the 358,000 first-time buyer transactions last year.

The government's move comes after a clampdown on mortgage lending, which has hit cash-strapped first-time buyers hard and led to the virtual disappearance of 100%-plus home loans.

Open Market HomeBuy is a key plank in the government's strategy for helping people into home ownership, and is primarily for public-sector workers such as teachers, nurses and police officers.

It is understood that some of those purchasing via the new version of the scheme being launched on April 1 will be able to take out a regular mortgage for as little as 50% of the property's value, with the remainder financed by top-up loans funded in part by the government. At the moment, participating buyers have to obtain a mortgage for a minimum of 67.5% of the property's value.

This change indicates that someone looking to buy a house with a market value of £200,000 will be able to take out a mortgage for just £100,000. But a homebuyer taking out a 50% mortgage will have to pay interest on the top-up loans from day one. This "rent" would initially be set at a cheap 1.75% a year, rising to RPI inflation plus 1% (currently 5.1%).

The original Open Market HomeBuy came into being after ministers struck a deal with four mortgage lenders in which they, and the government, share some of the cost of buying a home. However, the scheme was criticised because these cut-price mortgages were available to only a few first-time buyers and were seen as uncompetitive.

All the deals will now be withdrawn on March 31 and replaced with two new offerings.

It is understood that two consortiums have been picked to run the scheme: one made up of more than half a dozen housing associations operating predominantly in London and the south-east, including Metropolitan Home Ownership, Moat and Tower Homes, and the other headed up by Places for People, a housing and regeneration group, with funding provided by the Co-operative Bank.

It is the first of these two consortiums that will be allowing homebuyers to raise as little as 50% of the purchase price. What is more, they would be free to get their mortgage from any participating bank or building society. The housing associations will need mortgage lenders to back the scheme, and it is not yet clear whether this backing is forthcoming.

It is thought that Places for People will offer a minimum mortgage of 60%, and the presumption is that buyers will have to take out a Co-op Bank home loan. However, one benefit of this deal is that there will be no rent to pay on the top-up loans for five years. After that, interest would be charged at 5%.

Some of those who have applied to benefit from Open Market HomeBuy have been put off by the fact that, even with the assistance on offer, they cannot borrow enough money to buy a suitable home. Some have been turning to other shared ownership schemes. Others have found the scheme overly complex.

The government originally set itself a target of getting 20,000 people into home ownership in the first five years of the scheme, but by the end of February last year, just 200 had completed on a property using the initiative, and the total is now thought to stand at 2,000 at most.

There are a number of schemes designed to give struggling first-time buyers a leg-up on to the property ladder. Some help buyers by offering them a cut-price mortgage or allowing them to buy a stake in a property that they may eventually be able to buy outright. Such schemes include:

Ladder leg-ups

Open Market HomeBuy

Went live in October 2006. Three products available: a mortgage combined with "equity loans" from Halifax or Nationwide; a Yorkshire Building Society deal, and a "government equity loan" where the state hands a buyer 17.5% of the purchase price in the form of an interest-free, fee-free loan. It is claimed that, at most, only 2,000 people have completed on a property using the scheme.

Social HomeBuy

Allows housing association and local authority tenants who are not eligible for the "right to buy" or "right to acquire" schemes, or who cannot afford them, to buy a share in their rented home. Not all councils and housing associations offer the scheme.

New Build HomeBuy

The new name for shared ownership. Aimed at key workers, social housing tenants and others "in housing need". They purchase an initial share of 25%-75% of the property.